The Delhi High Court has refused to grant pre-arbitral security to UAE-based Rescom Mineral Trading FZE in its $17 million coal supply dispute with state-run Rashtriya Ispat Nigam Ltd. (RINL), making clear that attaching property before an arbitral award demands compliance with the principles of Order 38 Rule 5 of the Civil Procedure Code. The ruling draws sharper lines for interim relief under Section 9 of the Arbitration and Conciliation Act, especially in cases involving public sector enterprises.
Rescom, which supplied 77,465 metric tons of hard coking coal to RINL in June 2024, claimed outstanding dues of about ₹139 crore and sought to secure assets or funds before arbitration commenced at the Singapore International Arbitration Centre. It argued that RINL’s financial distress risked leaving it with a “paper decree.” But Justice Jasmeet Singh held that “financial distress alone is insufficient,” stressing that an applicant must establish both a strong prima facie case and credible evidence that the counterparty is dissipating assets to defeat an award. Mere apprehension, the Court said, cannot justify tying up assets in advance of arbitration.
For companies dealing with state-owned enterprises, the judgment delivers a clear message: weak balance sheets and contested claims are not enough. Interim security will only be granted when there is hard evidence of asset dissipation, and when the claim is crystallized and undisputed.
Proof of Dissipation, Not Just Financial Stress
In setting the standard, the Court addressed conflicting Supreme Court authority. While Essar House v. Arcelor Mittal Nippon Steel had suggested that courts could relax Order 38 Rule 5 technicalities in appropriate cases, Sanghi Industries v. Ravin Cables insisted on adherence to those preconditions. Justice Singh noted that “where coordinate benches take divergent views, the later view is to be followed,” and applied Sanghi Industries. At the same time, he reaffirmed that Section 9 courts are “not strictly bound by the text of the CPC” but are “guided by the same principles.”Applying this test, the Court found that Rescom’s allegations of asset alienation were “mere averments” without material evidence. By contrast, RINL had made partial payments of more than $2.4 million and transferred steel stock worth ₹40 crore to a Rescom affiliate, conduct that reflected “bona fide intention” rather than malafide attempts to frustrate recovery. The claims for demurrage, hull-cleaning charges and quality rebates were disputed and therefore “unadjudicated,” depriving Rescom of the strong prima facie case needed for interim protection.
Fear of ‘Paper Decrees’ Not Enough
Rescom’s central plea was that if interim protection was denied, any eventual award in its favour would be meaningless—a “paper decree” incapable of enforcement against a financially troubled counterparty. Its counsel urged the Court to take note of RINL’s financial statements, citing accumulated losses and liabilities, and pressed for attachment of assets as security.The Court, however, held that such apprehension was insufficient under Section 9. “Mere financial distress or losses in the balance sheet are not grounds for pre-award attachment,” Justice Jasmeet Singh observed. The order made clear that the test requires “credible material showing intent to defeat recovery,” and that without such evidence, the relief cannot be granted. The judgment emphasised that apprehensions of non-recovery, even if genuine, “cannot be a ground” to direct attachment before an arbitral award.
Higher Threshold for State Enterprises
The Court went further, stressing that claims against public sector enterprises demand an even stricter approach. “A higher threshold is required for granting interim relief against a Public Sector Enterprise where public revenue is concerned,” Justice Singh wrote, pointing to the risk of prejudicing public interest if operational assets of a state-owned company are tied up before arbitration.
The Court declined to enter into the merits of the quality dispute, noting that such issues belong before the arbitral tribunal. The petition was dismissed with liberty for the parties to approach the tribunal under Section 17 of the Act once constituted.
Representing the petitioner were Anirudh Bhakru, briefed by Agarwal Law Chamber, with a team comprising founding partner Divyam Agarwal, and associate Ananya Mago.
For the respondents, the legal team comprised senior advocate Rajshekhar Rao, Aashna Chawla and Zahid Hashmi, briefed by a team from Dentons Link Legal led by partner Shravan Yammanur, and including Mangesh Krishna, Prachi Kaushik.
